QUESTIONS FOR WRITING AND DISCUSSION
CVP analysis allows managers to focus on
prices, volume, costs, profits, and sales mix.
Many different “what-if” questions can be
asked to assess the effect on profits of
changes in key variables.
The units-sold approach defines sales
volume in terms of units of product and gives
answers in these same terms. The sales-
revenue approach defines sales volume in
terms of revenues and provides answers in
these same terms.
Break-even point is the level of sales activity
where total revenues equal total costs, or
where zero profits are earned.
At the break-even point, all fixed costs are
covered. Above the break-even point, only
variable costs need to be covered. Thus,
contribution margin per unit is profit per unit,
provided that the unit selling price is greater
than the unit variable cost (which it must be
for break-even to be achieved).
The contribution margin is very likely negat-
ive (variable costs are greater than revenue).
When this happens, increasing sales volume
just means increasing losses.
Variable cost ratio = Variable costs/Sales.
Contribution margin ratio = Contribution mar-
gin/Sales. Also, Contribution margin ratio = 1
– Variable cost ratio. Basically, contribution
margin and variable costs sum to sales.
Therefore, if contribution margin accounts for
a particular percentage of sales, variable
costs account for the rest.
The increase in contribution margin ratio
means that the amount of every sales dollar
that goes toward covering fixed cost and
profit has just gone up. As a result, the
break-even point will go down.
No. The increase in contribution is $9,000
(0.3 × $30,000), and the increase in advert-
ising is $10,000. This is an important ex-
ample because the way the problem is
phrased influences us to compare increased
revenue with increased fixed cost. This com-
parison is irrelevant. The important compar-
ison is between contribution margin and
Sales mix is the relative proportion sold of
each product. For example, a sales mix of
4:1 means that, on average, of every five
units sold, four are of the first product and
one is of the second product.
Packages of products, based on the expec-
ted sales mix, are defined as a single
product. Price and cost information for this
package can then be used to carry out CVP
A multiple-product firm may not care about
the individual product break-even points. It
may feel that some products can even lose
money as long as the overall picture is profit-
able. For example, a company that produces
a full line of spices may not make a profit on
each one, but the availability of even the
more unusual spices in the line may per-
suade grocery stores to purchase from the